The 5 Things You Should Know if You Have Bad Credit & Want to Buy a Home

By Myles Leva

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Last Updated: January 12, 2022

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So, you want to buy a home.

You’ve saved up some money for a down payment and have looked into some properties. You have narrowed down your options and are ready to make a decision. But you have one problem: bad credit.

This isn’t the most common situation to be in, but you’re still not alone. 18% of Canadians have a credit score of 679 or lower, which is where lenders start to consider borrowers “risky”.

If you have below-average or even bad credit, you will face some challenges. However, you should still be able to buy a home in all but the worst cases.

 

Will A Bad Credit Score Stop Me From Buying A Home?

If your credit score is too low, possibly.

However, most Canadians, even with a credit score well below average, can get at least a high-risk mortgage.

Most of Canada’s major banks won’t provide a conventional mortgage to someone with poor credit.

 

What is Poor Credit?

In Canada, a “poor” credit score is below 600. Categories can vary by lender, but 600 is a widely understood cutoff point.

Some trust companies will lend money to borrowers with a credit score below 600. However, once you fall below a credit score of 550, you will have to resort to alternatives.

If your credit score is 650 or higher, you shouldn’t face significant challenges securing a mortgage. Lenders consider more than just your credit score. So, if your other creditworthiness factors are satisfactory, you should be fine.

 

How Do I Know My Credit Score?

You can request a free credit report from one of Canada’s major credit reporting bureaus:

Your credit report will lay out your credit transaction history. It will provide a complete picture of why your credit score is what it is.

All Canadians can also access their Consumer Disclosure at transunion.ca.

 

What Do I Do If I Have Poor Credit?

Now, you know whether you have poor credit.

If you have poor credit and want to buy a home, there are a few things you should keep in mind.

1. Bad Credit Mortgage

The simplest option available to you is to simply seek out a mortgage that you can still qualify for.

This is a process of elimination. You will have to compare all of the lenders willing to lend you money. So, start by looking at the banks and seeing which ones would lend you money.

If no bank will offer you a mortgage, you can still resort to B lenders or “subprime” mortgage lenders. These are the lenders that do business with borrowers with less than ideal creditworthiness. There are a couple of ways to access these loans:

  • Reach out to the alternative lenders whose minimum requirements you still meet
  • Talk to a mortgage broker to be connected with a lender who will work with you

Working with a lender like this will normally mean a few things:

  • Some fees that a regular lender would not charge
  • Much higher interest rates
  • Risk of the lender selling your home to recoup losses if you default

 

2. Dealing With Bad Credit Mortgages

The process of comparing your options doesn’t change because your credit score is low.

You should in fact take extra time to compare the options available to you.

The most significant cost metric to consider with a bad credit loan is the annual percentage rate (APR). A mortgage’s APR represents the entire cost of taking the mortgage in an annualized percentage figure.

 

3. Bad Credit Mortgage Brokers

You could go to a bad credit mortgage broker to have them help you find a better mortgage for you.

If you choose to go to a mortgage broker, you should compare local brokers by their reputations. Check reviews from their previous customers. Also, compare the fees they charge. It’s normal for a broker to charge a “finder’s fee” of around 1%.

 

4. Bringing More To The Table

Depending on your score, you may still be able to deal with traditional lenders like banks, credit unions, and trust companies.

If you’re willing to get a mortgage with terms that account for your credit score, you can try offering a few things.

Lenders primarily look at your credit score, debt-to-income ratio, credit utilization, and income. You can use any of those factors to your advantage when dealing with lenders.

 

5. Higher Down Payments

Your down payment is another factor that lenders consider.

The minimum down payment for a Canadian mortgage is 5%. Conventional mortgage down payments start at 20%.

In light of bad credit, you can offer a higher down payment. By saving a larger down payment, you can mitigate the risk that lenders perceive in lending to you.

Read this next: 7 Important Things You Need to Know About Getting a Mortgage

 

Next Steps

If you want to buy a home, your credit score will play a key part in the process.

If you have bad credit, it will limit your options to some unfavorable loans. However, you can still get a mortgage, just with unfavorable terms.

As an alternative, it’s usually worth it to take some time to improve your credit. Improving your credit score before taking a mortgage can easily save you thousands of dollars in the long run.

Photo by Pavel Danilyuk from Pexels

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